The concept of ‘Be Digital , Live Digital’ is not something surprising for India and its 132 million population ever since the demonetization happened. It was then the concept of digital payments took the center stage and is now alltime popular. Its use was increased to three – folds with the advent of COVID -19 Pandemic in the country. Actually this pandemic taught us how much we are dependent on Digital platform for monetary transactions. The success of payment platforms like PayTM , Google Pay , Phone Pe etc. are all the result our belief and regular dependency on these digital platforms that as per a report , India will surpass the volume of digital transactions of $ 2 trillion by 2022.
Payment ecosystem has grown massively in the last decade due to the work done by RBI, NPCI, Banks, Fintechs and the entire ecosystem. Banks have been investing heavily in infrastructure and technology to support payment products including RTGS, NEFT, UPI, IMPS, AEPS, BBPS etc. This has improved the life of retail customers with multiple options being available at low costs. Smaller banks have not been able to make payment business profitable.
RBI has come up with New Umbrella Entity for Retail payments in the month of August 2020 to de-risk the dependency on NPCI. RBI shall authorize these NUEs under Section 4 of the Payment and Settlement Systems Act (PSSA), 2007. The objective of the notification was to set up a Pan India entity for focusing on retail payments. In this article we will look into the features of the NUE and their relevance in the current context.
Any promoter or group who has an experience of three years in the payment ecosystem as an operator, service provider, or technology service provider may apply for New Umbrella Entity (NUE).
Apart from it, any entity having more than 25% of the paid-up capital of the NUEwill also be deemed to be a promoter. In the case of a foreign investor, he or she is required to comply with the FDI (Foreign Direct Investment) policy and guidelines of the government of India and must also follow DIPP (Department of Industrial Policy and Promotion) and FEMA (Foreign Exchange Management Act) policies.
The applicant is required to follow corporate governance norms and should take the approval of RBI for the appointment of board members.
Conditions for becoming member of NUE
- The primary condition to become an NUE is that the applicant must adopt Fit and Proper model. RBI has stated that the applicant entity and the promoter should be fit and proper and must have a track record of financial integrity, good reputation and character, and honesty.
Such a person should not have incurred disqualifications such as-
- He must not be convicted by a court for any economic offense;
- Declared insolvent and not discharged;
- Not financially sound; and
- Of unsound mind.
Capital requirements under NUE
The entity applying for the NUE must have a minimum paid-up capital of 500 CroreRupees. Capital allocation should be done to support or address the need for capital for managing risk, invest in technological infrastructures, for business operations, etc. As per RBI any single promoter or group not to have more than 40% investment in the capital of the NUE. RBI requires the promoters to demonstrate not less than 10% that means 50 crore rupees, capital contribution at the instance of making the application for setting up the NUE. RBI has allowed the promoter or the promoter group shareholding to dilute a minimum of 25% after five years of the start of the business of the NUE. A minimum net worth of 300 crore Rupees shall be maintained at all times.
Working under NUE
NUE shall set up, manage and operate new payment systems especially in the retail space including but not limited to ATMs, white-label, PoS (Point of Sale) and Aadhar based payments and remittance services, develop new payment method, standards, and technologies and monitor related issues in the country and internationally. NUE shall take care of the developmental objectives, such as the enhancement of awareness about the payment systems. It should operate in clearing and settlement systems, identify relevant risks and manage them such as settlement,
credit, liquidity, and operational and also preserve the integrity of the systems. It shall fulfill its policy objectives and make sure that the principle of fairness, equity, and competitive neutrality is applied in determining participation in the system.
It shall frame necessary rules and the related processes to ensure the safety of the system and that the payments are exchanged efficiently. NUE may carry on any other business as suitable to strengthen the retail payments ecosystem in the country.
Business plan for setting up of NUE
As per RBI, the application for setting up an NUE shall contain a detailed business plan covering the payments system proposed to be set up and or operated with other documents to establish its experience in the payment ecosystem.
Such a business plan shall include technology, security features, market analysis/research, benefit, if any, of such payment system, operational structure of the payment system, the time period for set up of the payment systems and proposed scale of operation, etc. The proposed organizational strategy with respect to fulfilling its responsibility as an umbrella entity will also be included in the business plan.
Once an entity applies for the license of NUE, scrutiny of the applications shall be undertaken by the External Advisory Committee (EAC). The committee shall provide its recommendations to the Reserve Bank of India. Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) shall be the final authority for issuing authorization for setting up of NUE. The Reserve Bank shall complete the process within a six months period.
Benefits of Establishing NUE
- Once established, these newly authorized entities will be able to operate their own clearing and settlement systems.
- Establish new standards and technologies
- Develop innovative new payment systems that enhance customer access, convenience and safety.
- All NUEs will have to be interoperable with the National Payments Corporation of India (NPCI).
Four major consortiums have applied for the NUE licences. These include:
- Reliance Industries, Infibeam Avenues, Facebook and Google
- Tata, Kotak Mahindra Bank, HDFC Bank, Nabard, Mastercard and Flipkart
- Paytm, Ola Financial, IndusInd Bank, PolicyBazaar and Zeta
- Amazon, ICICI Bank, Axis Bank, Pine Labs, BillDesk and Visa
- SBI- BOB – HDFChad applied for NUE framework which the finance ministry red flagged citing reasons that it would affect the working of NPCI (nonprofit) who is majorly dealing with management of payment and settlement in country.
- Various Bank Union and other associations have opposed the setup of NUE and licenses to the corporates as it would defeat the very principle of equity and fairness in the payment and settlement system.
If NPCI in existence then why NUE ?
- Any new entrant in the business having no legacy issues, will have the zeal as well as the flair to innovate and try new solutions. NPCI innovated on P2P payments, brought UPI on top of the IMPS rails. It also brought FAStags, RuPay cards, AePS payments and much more.
- NPCI has come to dominate the space
- If India gets two or three such bodies, it will mean more innovation. The RBI has mandated interoperability between NPCI and new players, so consumers will not be affected and instead will have more choices.
- Customers will be able to choose the payment mode they are most comfortable with.
Issues with NPCI
- There would be consequences to letting NPCI only entity in handling the payment system.
- Any sort of monopoly results in market inefficiencies.
- Having just one umbrella regulator, we will never be sure if transaction costs are as low as they could be, or if the variety of product offerings available to us could be better.
- Problem is that the NPCI is expected to both manage the digital payments industryas well as come up with the frameworks necessary to foster innovation.
- When NPCI had just small products in its portfolio it was able to perform both functions efficiently.
- The effort of just keeping the system working seems to be taking a toll on NPCI’s ability to develop the protocols and standards that are needed to encourage innovation in this boom sector.
- To create a separate and independent standards-setting body.
- Such body would come up with the protocols and standardsrequired to foster innovation in the digital payments space
- Any new standard that this body creates will have to first be approved by the NPCI, but then it can be rolled out throughout the digital payments ecosystem.
The framework for New Umbrella Entity by the RBI is a welcome step in terms of opening up avenues for private participation in developing the retail payment infrastructure in India and introducing new technologies and systems to consumers at large. It could well lead to more synergies and innovation in the fintech industry, thereby creating competition at the root level of the payment systems.By establishing a neutral and independent standards-setting body, we can make sure that the system as a whole in our country evolves in the best traditions of digital infrastructure adopted anywhere in the world. Only
thing need to be looked in this aspect is that the new entrants applying for the licenses should not be defeating the principles of equality and fairness and maintain transparency in the charges and service rules. If this is achieved then India is welcoming this alternative payment and settlement system to the new Digital India.